INDIA Law and Practice Contributed by: Alina Arora, Samarth Gupta and Parth Singh, Shardul Amarchand Mangaldas & Co
6. M&A, Joint Ventures and Foreign Direct Investment in the Defence Sector 6.1 FDI Screening Legislation and Regulatory Framework FDI in the defence sector may require government approval depending on its quantum and always requires MHA security clearance, irrespective of FDI quantum. FEMA and the NDI Rules together constitute the over - arching statutory framework for government approv - al for FDI/FDI screening in the defence sector, with details of the screening process prescribed under the Consolidated FDI Policy read with the DPIIT’s Stand - ard Operating Procedure for Processing FDI Propos - als last issued in May 2026 (the “FDI SOP”). The MoD (through the DDP) is the competent author - ity for defence sector FDI approvals, except for small arms and ammunition (where the MHA decides). The DPIIT, as the nodal department, routes applications to relevant authorities and must concur in any rejec - tion or additional condition; the MHA provides security clearance; and the MEA is consulted. Industrial/manufacturing licensing under the IDRA or the Arms Act (as applicable) and security clearance for FDI proposals run in parallel with the government approval for FDI. The government can review any foreign investment in the defence sector on national security grounds. 6.2 Transactions Subject to FDI Screening Transactions Covered FDI in the defence sector encompasses the fresh issue and transfer of equity instruments (equity shares, compulsorily convertible preference shares and debentures, and warrants) of newly incorporated joint ventures or existing investee companies. Technology licensing, without equity participation by the foreign technology licensor in the Indian licensee company, is not FDI and will not by itself amount to a screening event.
Thresholds FDI up to 74% is permitted under automatic route for companies seeking new industrial/manufacturing licences. FDI beyond 74% in such companies requires government approval, available where it is likely to result in access to modern technology or for other reasons to be recorded. For companies not seeking a new licence (including those already licensed) or already holding government approval for FDI, fresh FDI up to 49% requires a dec - laration to the MoD within 30 days of the change. FDI beyond 49% in such companies requires government approval. Security clearance from the MHA is required, irrespec - tive of the proposed FDI quantum. Land-Border Investors Any investment by an entity of – or beneficially owned by a citizen/entity of – a country sharing a land border with India (Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan) requires prior govern - ment approval, irrespective of the size of the stake, except in the case of non-controlling beneficial inter - ests of up to 10%, where mandatory reporting replac - es the requirement for prior government approval. 6.3 Mandatory vs Voluntary Notification Where government approval is required (by reason of quantum of FDI or a land-border investor), it must be obtained before closing. MHA security clearance is mandatory for every FDI in the defence sector, what - ever the quantum (see 6.2 Transactions Subject to FDI Screening ). Contravention may attract penalties under FEMA, Applications for government approval for FDI in the defence sector are filed on the National Single Win - dow System and routed by the DPIIT to the MoD as the competent authority, with copies to the MHA (for security clearance), the MEA and the RBI. The appli - cation covers the group structure, beneficial owner - ship, source of funds, business plan, and downstream investments. Under the FDI SOP, the stated disposal compounding, and directions to unwind. 6.4 Review Process and Timetable
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